Dividend investing is a very popular strategy, especially in Singapore, but of course people from other countries all over world like it! Who don’t like regular cash posted into your bank account?
However, I am not sure why but this term “Dividend Investing is Dangerous” has been floating around in the investing community recently. I have no idea where this term came from, but since I have been seeing this term, maybe let me share something more about dividend investing?
What is Dividend Investing?
The primary goal of dividend investing is to generate income from the dividends received. Dividend investing is like picking stocks from companies that are in the habit of sharing a slice of their earnings with people who own their shares.
These earnings, called dividends, are usually handed out on a regular basis, like every few months or every year, and sometimes even every month. The cool part about dividend investing is that it’s all about getting a steady flow of pocket money from your investments. These regular cash flow if large enough, can replace your monthly paycheck!
Imagine if you have $1 million in dividend stocks/ETFs, that give you 6%, this mean you will get $5000 monthly, which is the pay of average person on the street! That’s why the lure of dividend investing is great, it can replace your work income “one day”.
Of course, investors also find dividend stocks appealing because they have the chance to see their investment grow in value. As the company’s stock price goes up, the value of the dividends they receive also goes up. This combo can result in a notable boost to the overall worth of your investment as the years go by – these are dividend growth stock.
“Dividend Investing is Dangerous”
Why dividend investing in dangerous, let me share some points on why is this so.
1. Dividend cannot cover the Capital loss due to drop in price
Do you think Dividend Investing is dangerous? One very common point that came up is that the dividend that you get can’t cover the capital loss from the share/etfs.
If the share prices keep dropping (lao sai) until you have to go to the toilet/loo/washroom, does dividend investing really work, is it dangerous?
Let’s say you put $100,000 into a share/etf that give you 6% (I put 6% because recent US 10 years treasury yield already give you 4.2%, hence there is risk premium to equity). This mean that you will earn $6000 per year, $500 per month. However, the share price drop 10%, such that your original invested capital is only worth $90,000 now, hence effectively, you lose $10,000 – $ 6000 = $4000. You might as well put in growth stock that grow more?
Let’s repeat this, “Dividend Investing is Dangerous”?
2. Companies that should reinvest their earnings rather than give out dividends
It’s better for a company to reinvest their earnings, to grow the equity/asset of the companies rather than giving the cash out as dividends. Once a company is worth more, the share price of the companies will go up naturally. If the company gives out cash as dividends, the companies will be worth less.
If you’re a shareholder of a company that pays dividends, it’s also important to understand why the company gave out those dividends in the first place. If they did so because they thought it was best for their long-term growth and financial health, then great!
But if they’re only paying out because they need cash flow right now–and will never reinvest those earnings into growing their business–then that’s not so good.
Another possibility is that Companies that pay out large amounts of money as dividends are often doing so because their management teams aren’t confident enough about how much more revenue can be generated through reinvestment opportunities within the business itself (like R&D or new product development). This could be due to:
- Poor management who don’t know how best use capital wisely
- Poor capital allocation skills (e.g., poor M&A decisions)
- Weak demand for goods/services offered by this particular industry segment
3. Investing in Index Funds/ETFs are better, more diversified and safer, gives better total return
Let’s say you invest $10,000 in an S&P 500 index fund.
The index fund is a diversified basket of 500 stocks that mirrors the performance of the entire market. It’s possible for all 500 stocks to decline at once and for your portfolio to fall by 5% or 10% overnight. But if you have $10,000 invested in five different stocks whose price falls by 5% each over a month or two, then your portfolio would have lost just 1%.
You would have lost less because you spread your money around among several companies rather than putting all your eggs in one basket. That’s why diversification is so important when investing in individual stocks or mutual funds as well as when investing in broad indexes like the S&P 500 (SPY).
Invest in Index fund, and get market return is better. Ultimately, most active professional fund manager can’t beat the market index fund return in the long run.
4. Dividends can be stopped anytime
There are many investors that just look at the dividend history and dividend yield rather than the companies itself.
If you are a retiree that rely on dividends for survival, bear in mind that dividends can be stopped anytime. Companies can change their minds, go out of business and cut or raise dividends as they see fit. Hence sustainability of the business is more important than just looking at the dividend yield, history.
The high yield of dividends can mislead investors into thinking that dividend stocks are much safer than other kinds of stocks. The dividend yield is not a good indicator of a company’s profitability, it may not be sustainable.
The best way to evaluate the safety of your investments is by looking at the company’s fundamentals: its balance sheet and cash flow statement–not its dividend yield.
Hence, this goes back to the point that total return is important, not just dividend. Total return is capital gain + dividend.
Just Dividend alone is dangerous as it misguide you thinking that this is the the total return that you get.
Dividend investing is Dangerous or not?
The above 4 points are points that highlight why dividend investing is dangerous! There are of course others points that argue against or argue for investing investing. One can has mixture of dividend only (reits for examples), or dividend growth stocks/etf, or grow stocks, or index fund etc..
Ultimately, most importantly, whatever method you use, you must be able to sleep well. Know your own risk profile, create your own method that suit you the best such that you can pass sleep test. Otherwise, if your stocks/shares/cryptos/other assets suddenly needs to go to toilet/loo/washroom lao sai (drop in value), one will panic sell instead of rationally cut loss due to change in fundamental or wait for price recovery.
Personally I think dividend investing is not dangerous, I can write a long article on this but shall do this another time. However, dividend investing is often more effective as a long-term strategy. Over time, the power of compounding can lead to significant returns, particularly when dividends are reinvested.
In short, I strongly support dividend investing for those who know what to buy.
For those who don’t, do index investing better using world index funds.
Collect dividends -> invest in companies that are fundamentally strong -> companies generate more revenue and thus more dividends -> companies give you dividends -> collect the dividends and reinvest and so on.
Good articles that you should read!
People are drawn to dividend investing.
Why? Firstly, dividends provide a regular stream of income, allowing investors to receive a portion of the company’s profits on a periodic basis. This can be particularly attractive for individuals seeking consistent cash flow or looking to supplement their existing income. Additionally, dividend investing is often viewed as a more stable and predictable investment strategy compared to relying solely on capital appreciation.
I always write and share articles, especially on dividends which many people love them. Do read them!
- Simplified Guide to the Key Gist of Grant of Probate and Estate Planning
- Cheapest and best way to trade Singapore Stocks with CDP
- Mastering Dividend Investing: 5 Evergreen Investment Principles
- Unlock Lucrative Returns with IAPD: A High-Yield ETF Providing 7% Annual Yield and Quarterly Payouts
- Unlock Lucrative Returns with SDIV: A High-Yield ETF Providing 11% Annual Yield and Monthly Payouts
- If I am a dividend investor, this is what I would do….
- 7 Things to consider before buy a dividend stock
- 4 Dividend ETFs that can let you sleep well even in the scary bear market
- 5 Best Counters for Passive Dividend Investing
- The Three MOST Important Traits of an Investor
- What is the best investment strategy in the world?
- Ultimate Strategy of buying REITS: XXX instead of X000?
- Ultimate Free 2 Days Reit MasterClass: Exclusive at Careyourpresent.com only!
Alternatively, you can go the right side of my page, there is a search bar where you can simply search “dividend” to see all my articles related to dividends!
Of course, you can search for other things that would interest you such as “Careyourpresent”, “Reits”, “Side Hustles”, “Fixed Incomes”, “Savings” etc.
Money just buy you the chance of freedom.
When you are young and working, you exchange time for money. When you are old, you can have lots of money but you can’t buy time back, especially the things that you have missed while busying striking out in career. Of course, if you love your career, and consciously know that you are missing out the first time your child walk or talk, that’s ok, but if you are the other spectrum, please do something about it.
Your kids grew up and they no longer need you to accompany them. They no longer want to sit on your lap to share/do things with you…all these time you spent in your 9 to 6 or even longer cubicles…can the money that you have earned by you back these?
We always thought we have more time with our old parents, but we are wrong. Time with them is ticking away every day. One day it will suddenly be gone. There is no regret medicine, no reset in time. Gone is gone and cannot come back. No matter you are billionaires or millionaires, you cannot reset this.
We always thought that we have more time with our spouse every day, but we are wrong. One day they will be gone too. When you read this, please go tell your spouse that you love him/her and he or she is the best thing that you ever had in your life.
I have picked out some of the more life reflecting articles of the CAREYOURPRESENT series. Do read them:
- The Best Advice to Parents and Child
- What if Later never come?
- What will you bring with you on your last day on Earth?
- Time is the ultimate currency, not money
- Our Life only have 5 short Days – we should live the best for every day
- Truly understand Living in the Moment now
- 11 Important Unexpected Life and Money lessons to learn from Your Children
- The days are long but the years are short
- Ditch your mobile phone to build real life
- Careyourpresent: Time is the most important
- Careyourpresent: What is your purpose of life?
- Careyourpresent : Greatest Regrets in life
- Careyourpresent : You might not believe it. It’s little unexpected things that make up a real life
- Careyourpresent: Something only happen once in life, if you missed it, it’s gone forever…
- Careyourpresent : Why is Gold useful?
- Careyourpresent: Frozen. Let it go!
Love your life daily.
You have one less day with your spouse, parents, children and yourself.
Time is ticking away.
For each passing day,
Enjoy and Treasure your Life!
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